AAT L3 Indirect Tax (UK VAT) 4 — Questions and Answers
Question 1: The reverse charge for VAT applies when:
- A UK consumer buys goods from a UK retailer
- A UK VAT-registered business receives certain services from an overseas supplier and self-accounts for the VAT (Correct answer)
- A business issues a credit note to a customer
- A business has a bad debt
Correct answer: A UK VAT-registered business receives certain services from an overseas supplier and self-accounts for the VAT
The reverse charge shifts the VAT accounting responsibility from the overseas supplier to the UK customer; the UK business accounts for both output VAT (as if it were the supplier) and input VAT on the same return.
Question 2: Bad debt relief for VAT is available when:
- A customer delays payment by more than 30 days
- The debt is over six months old from the due date, has been written off, and full VAT was originally accounted for (Correct answer)
- The business is a cash accounting scheme user
- The customer is a VAT-registered business
Correct answer: The debt is over six months old from the due date, has been written off, and full VAT was originally accounted for
VAT bad debt relief allows a business to reclaim output VAT previously paid to HMRC on a debt that has been written off as irrecoverable and is more than six months overdue from the date payment was due.
Question 3: Making Tax Digital (MTD) for VAT requires businesses to:
- Submit paper VAT returns quarterly
- Keep digital records and submit VAT returns using compatible software (Correct answer)
- File annual accounts online
- Pay VAT monthly regardless of turnover
Correct answer: Keep digital records and submit VAT returns using compatible software
MTD for VAT (mandatory for all VAT-registered businesses) requires digital record-keeping and submission of VAT returns using MTD-compatible software, with a digital link from records to submission.
Question 4: If a business uses the standard VAT accounting method and a customer does not pay an invoice, the business:
- Has already paid output VAT to HMRC and can reclaim it after 6 months if the debt is written off (Correct answer)
- Does not pay output VAT until the customer pays
- Automatically receives a credit from HMRC
- Cannot reclaim the output VAT under any circumstances
Correct answer: Has already paid output VAT to HMRC and can reclaim it after 6 months if the debt is written off
Under standard (invoice-based) VAT accounting, output VAT is payable to HMRC when the invoice is issued, regardless of payment. If the customer never pays, the business can reclaim the VAT after 6 months via bad debt relief.
Question 5: The default surcharge regime for late VAT returns and payments has been replaced by:
- Fixed penalty notices
- A late submission penalty points system and late payment interest/penalties (Correct answer)
- Automatic doubling of the VAT liability
- A referral to the criminal courts
Correct answer: A late submission penalty points system and late payment interest/penalties
From January 2023, HMRC replaced the default surcharge with a points-based late submission penalty regime and a separate late payment penalty system, aiming to be more proportionate for businesses.
Question 6: A business intending to make only exempt supplies should:
- Register for VAT voluntarily
- Not register for VAT as it cannot reclaim input VAT (Correct answer)
- Register but use the flat rate scheme
- Apply for partial exemption status
Correct answer: Not register for VAT as it cannot reclaim input VAT
A business making only exempt supplies is not required to register for VAT (as exempt supplies are not taxable), and there would be no benefit in voluntary registration since input VAT on costs cannot be reclaimed.
AAT L3 Indirect Tax (UK VAT) 4
The reverse charge for VAT applies when: